Greetings and Happy Tuesday! This is Tax Roast, a weekly newsletter that brings you the latest updates and insights from the international tax world from tax experts (and coffee enthusiast) who are walking the tax advisory path.

And do not forget to check out our coffee of the week, because there is no tax news without a good cup of coffee :)

International Tax Update

Cayman Islands / New economic substance measures published

On 8 February 2024, the government of Cayman Islands unveiled a bill which proposes substantial changes that aim to clarify the concept of "local partnership" for "relevant activity" purposes. You can find an overview of this and other 2024 tax measures HERE.

Switzerland / Tax authorities publish extensive TP guidance

On 23 January 2024, the Swiss Federal Tax Authorities (SFTA) published an extensive commentary on transfer pricing (TP). The guidelines define the arm's length principle and its application in both Swiss profit and withholding tax. The guidance also describes the three-tiered approach to TP documentation and existing procedures to avoid and resolve TP disputes. For a full overview, you can check out an article HERE or go straight to the SFTA’s website for the guidance (only available in French or German).

Ecuador / Free Trade Agreement with China aproved

On 7 February 2024, the Ecuadorian National Assembly approved the free trade agreement (FTA) with China (People's Rep.). If you want to know what this means for trade between Ecuador and China, you can click HERE.

Japan / EU and Japan sign EPA

On 31 January 2024, the European Union and Japan signed in Brussels an amending protocol to update the economic partnership agreement (EPA) between them, signed on 17 July 2018, following the conclusion of the negotiations in principle on 28 October 2023. The amending protocol will ensure the inclusion of provisions on cross-border data flows in the 2018 EPA.

On 29 January 2024, the Council of the European Union adopted the decision on the signing of the amending protocol and also decided to send the decision to ratify it to the Parliament for its approval.

Fun Tax Fact of the Week

Global minimum tax / Pillar 2 bootcamp

Last week we looked at the charging mechanisms under the Pillar 2 rules and learned that the IIR is the main charging rule and it must be applied by the Ultimate Parent Entity (UPE). And while this seems obvious, one should not forget that in MNE structures, there are several layers of entities. So what about those entities between the UPE and the low-taxed CE?

Ever heard of Intermediate Parent Entity or IPE? An intermediate parent entity is a constituent entity that isn’t a UPE and that owns an ownership interest in another constituent entity in the MNE group. Just as for a UPE, an intermediate parent entity that owns (directly or indirectly) an ownership interest in a low-taxed constituent entity applies the IIR (assuming it is located in a jurisdiction that applies an IIR) and pays top-up tax based on its allocable share of the top-up tax of the low-tax entity. Again, just as with a UPE, a controlling interest in the low-taxed constituent entity isn’t required. You may be thinking, well, if there is a UPE and an intermediate parent entity that has an ownership interest in a low-taxed entity, who pays the tax?

As we saw last week, the Pillar 2 rules foresee a applies a top-down approach. This means that the IIR falls to the entity at the top of the ownership chain. If there is no IIR in force in the jurisdiction of the UPE, the liability to account for top-up tax under an IIR then flows down the ownership chain.

If there are two or more intermediate parent entities that own an interest in a low-taxed entity, again this top-down approach applies, so the entity that is highest in the chain that applies an IIR would be liable.

And then there are also Partially Owned Parent Entities (POPE). A POPE is defined as a constituent entity, other than a UPE, a Permanent Establishment or an Investment Entity that owns (directly or indirectly) an ownership interest in another constituent entity in the same group, and the right to more than 20% of its profits are held by persons that aren’t part of the MNE group. There’s a departure here from the standard top-down rule for POPEs as, even if a UPE applies an IIR, if there is a POPE that owns an interest in a low-taxed entity it will also need to apply the IIR. If there are two or more POPE’s in the ownership chain that hold an interest, then the top-down approach applies providing the subsidiary POPE is wholly owned by the parent POPE.

Leadership principles for top managers at Big Multi Inc. 🏢

Rule #6 - Group Alignment

So you have been promoted, created a mission statement, polished your unique and delicate vision, renamed your department.... and now you are ready to make the next step. We are here to guide you in the journey.

First and foremost you need to allocate your coworkers into four groups by using the following categories: 

• Stupid (don't forget to include those who don't look as such at first look, they may even have excellent degrees and papers but still.... - remember papers are most important in distressed situations, eg. in case of diarrhea)

• Smart (test them with random questions that you have just checked on the internet the previous day, the questions should be asked in unexpected moments and they should not be any context with the ongoing discussions)

• Lazy (this is the natural state of a homo sapiens, we were all evolved to save energy so expect a large group here)

• Diligent (yes, you can still find some examples even in big organisations)

The smart and lazy ones are your folks, they will not threaten your position and in return for some small treats (rewards in HR speak) they will always find efficient shortcuts on how to get the stuff done. The stupid and lazy ones are of limited usefulness until  a full-time-equivalent-employee-adjustment event is initiated by the CEO, i.e. when you will have to get rid of some folks, a list in your pocket of the less-top-notch experts is a must have to repurpose few colleagues. The lazy and diligent ones are vital because they are happy to deal with whatever tasks you assign to them and at Big Multi Inc. you will have tons of useless tasks, nonsense reports and virtual meetings without purposes, etc.etc.

The box for smart and diligent ones should be empty, if not, it is a RED FLAG (and a big one!). Officially there can be only one: You. (If you have identified anyone who can potentially be in this category, immediate action is required to facilitate his/her journey to another department or another employer or ... 

Tax Roast of the week,

Invite the crew for a coffee☕

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Coffee corner

It is not commonly known that besides robusta and arabica beans you can buy excelsa beans too. If you have not heard of this type of coffee, it is OK, probably you are not the only one.

Due to the size of the excelsa coffee plant and some other features that make it more difficult to grow in an industrialized way, the amount of excelsa beans produced each year is smaller compared to the global arabica and robusta production. It is estimated that only approx. 5-7% of the global coffee production is excelsa. Excelsa is mostly grown in Asia (e.g. Vietnam) and Africa (e.g. Ethiopia, South Sudan) but you can find producers in Central America too (e.g. Costa RIca and Guatemala). 

What to know about excelsa? What does the coffee made of it look like? Its caffeine content is significantly lower than what you can find in regular robusta or arabica coffees which is good news for those who want to limit the daily caffeine intake but would not like to make a compromise about the number of daily expressos or cappuccinos. Its taste is also different to the regular pure arabica coffees or blends of robusta and arabica coffees. The most commonly used words to describe its taste are: complex, deep, rich, fruity, woody and earthy.In blends it is typically used because it enhances the taste by adding more substance and power to it. Where can you buy it? Definitely not at the closest grocery shop. Very good selections are available online or you can visit your local specialty coffee shop. It is definitely worth trying to experience a truly unique coffee flavour and aroma.

Enjoy your daily cup of coffee!

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